Marathon Oil Reports 4Q and Full-Year 2004 Results

Marathon Oil reported fourth quarter 2004 net income of $429 million, or $1.23 per diluted share. Net income in the fourth quarter 2003 was $485 million, or $1.57 per diluted share. Marathon reported fourth quarter 2004 net income, adjusted for special items, of $415 million, or $1.19 per diluted share, compared to net income adjusted for special items, of $203 million, or $0.65 per diluted share, for fourth quarter 2003.

Marathon reported 2004 net income of $1.261 billion, or $3.73 per diluted share. Net income in 2003 was $1.321 billion, or $4.26 per diluted share. Marathon reported 2004 net income, adjusted for special items, of $1.369 billion, or $4.05 per diluted share, compared to net income adjusted for special items, of $1.073 billion, or $3.45 per diluted share, for 2003.

"Marathon's strong fourth quarter and full-year 2004 earnings demonstrate the ongoing progress we are making in focusing and executing on key business strategies that are fueling profitable growth," said Clarence P. Cazalot, Jr., Marathon president and CEO. "2004 was marked by strong commodity prices, tight supplies of finished product due in part to constraints of the U.S. refining system, severe weather in the Gulf of Mexico, and an overall narrowing of the oil supply/demand balance in the face of growing worldwide demand for energy. While we were challenged by these market factors, each of the company's three business segments improved profitability over 2003. In particular, MAP achieved its second best year since being formed in 1998, once again demonstrating the value of Marathon's fully integrated strategy."

Continued Strong Exploration Success

Marathon continued its successful exploration program with six discoveries during 2004 in Norway, Angola, the Gulf of Mexico and Equatorial Guinea. These discoveries reflect the company's balanced exploration strategy which places greater emphasis on near-term production and lower risk opportunities, while retaining an appropriate exposure to longer-term options.

In the fourth quarter, the company announced the Gardenia natural gas and condensate discovery on the Alba Block (Sub Area B) offshore Equatorial Guinea, approximately 11 miles southwest of the Alba field. The well encountered 150 feet of net gas/condensate pay in the Upper Isongo section, which is also productive in the Alba field. A 60 foot net pay interval was tested at a stabilized rate of 18.6 million cubic feet of gas and 1,300 barrels of condensate per day. The company is evaluating development scenarios for Gardenia, one of which includes production through the Alba field infrastructure and the future LNG facility under construction on Bioko Island. Marathon holds a 63 percent interest in Sub Area B and serves as operator.

Also in Equatorial Guinea, Marathon announced an offshore discovery on the Alba Block (Sub Area A). The successful Deep Luba well, drilled from an Alba production platform, reinforces the additional resource potential of the Alba field in which Marathon holds a 63 percent interest.

In Norway, the company announced its Hamsun discovery located on production license (PL) 150 located approximately six miles south of the Alvheim area on the Norwegian Continental Shelf. Hamsun well results are being analyzed and possible development scenarios are being examined including a possible tie-back to the Alvheim development. Marathon holds a 65 percent interest in Hamsun and serves as operator. In addition, Marathon acquired four new Norwegian exploration licenses (three operated) in the December 2004 APA License Round.

Offshore Angola, Marathon participated in two deepwater discoveries on Blocks 31 and 32. The Venus-1 discovery represented the company's fourth successful well on Block 31. This discovery, along with the three previously announced discoveries on Block 31, form the basis for a planned development of the Northeast Development Area. In addition, Marathon participated in a well on the Palas prospect in the southern portion of Block 31. The Palas-1 well has reached total depth and results will be announced upon government approval. Also, in the central portion of Block 31, operations are ongoing on the Ceres prospect. Marathon holds a 10 percent interest in Block 31.

On Angola Block 32, Marathon participated in the Canela-1 discovery, the second discovery on this block. In addition, a well on the Cola prospect has reached total depth and encountered hydrocarbons, but additional work will be required to determine commerciality. Lastly, a well on the Gengibre prospect has reached total depth and results will be announced following government approval. Marathon holds a 30 percent interest in Block 32.

In the Gulf of Mexico, Marathon and its partners in the Neptune Unit announced the results of the Neptune-7 appraisal well which, along with data from other Neptune wells, is being used to assess development options for the field. Front End Engineering and Design (FEED) for a Neptune development is anticipated to result in project sanction around mid-year 2005. Marathon holds a 30 percent interest in the Neptune Unit.

Strengthened Core Areas

During 2004, Marathon continued to make significant progress in advancing key development projects that will help serve as the basis for the company's production growth profile in the coming years.

In Norway, the company made substantial progress in advancing the development of the Marathon-operated Alvheim area. A key milestone occurred in October when the Norwegian Ministry of Petroleum and Energy approved the company's Alvheim PDO which will consist of a floating production, storage and offloading (FPSO) vessel with subsea infrastructure for five drill centers and associated flow lines. The PDO also outlines transportation of produced oil by shuttle tanker, and transportation of produced natural gas to the existing UK SAGE system using a new 14-inch, 24-mile cross border pipeline. Tendering for all major construction contracts is nearing completion and Marathon anticipates awarding contracts for FPSO topsides construction and hull modifications during the first quarter 2005. The approved Alvheim PDO includes the Kneler, Boa and Kameleon fields in which Marathon holds a 65 percent interest and serves as operator.

Also during 2004, agreement was reached to utilize the Alvheim infrastructure to develop the nearby Vilje discovery, in which Marathon holds a 46.9 percent interest. The Vilje PDO was submitted by the operator, Norsk Hydro, to the Norwegian Government in December 2004. The combined Alvheim/Vilje developments are expected to ramp up production to more than 50,000 net barrels per day (bpd) during 2007.

In Equatorial Guinea, Marathon continued its significant expansion programs with the completion and continued ramp-up of production from the condensate expansion project. As of year-end 2004, gross condensate production averaged approximately 43,000 bpd. At full capacity, the condensate expansion will increase total liquids production to approximately 57,000 gross bpd (32,000 bpd net to Marathon). The company's LPG expansion project is on schedule for start-up during the second quarter of 2005. The project is mechanically complete and commissioning is in progress. Upon completion of the LPG expansion, gross liquids production will increase to approximately 79,000 bpd (44,500 bpd net to Marathon) during the second half of 2005.

In Ireland, the An Bord Pleanala announced that it has upheld the Mayo County Council's decision to grant planning permission for the proposed natural gas terminal at Bellanaboy Bridge, County Mayo, which is to be built to bring gas from the Corrib field ashore. This decision represents a major step forward for the Corrib gas project, in which Marathon holds an 18.5 percent interest. Construction began in December and first gas production is targeted for mid-year 2007.

In Libya, Marathon continues to work with its partners, including the Libyan Government, to finalize the terms of the group's reentry agreement following the lifting of U.S. sanctions in early 2004. The parties continue to make progress toward a final agreement and they are optimistic that it will be finalized in the near future. Marathon holds a 16.33 percent interest in the approximately 13 million acre Waha Concession.

Increased Proved Reserve Base

During 2004, Marathon added net proved reserves of 221 mmboe, excluding 2 mmboe of dispositions, while producing 122 mmboe during the year. Of particular importance is that during 2004 Marathon added approximately 136 mmboe through extensions, discoveries and other additions, which alone more than offset 2004 production. Over the past three years, the company has added net proved reserves of 782 mmboe, excluding dispositions of approximately 280 mmboe, while producing approximately 411 mmboe. At year-end, Marathon had estimated proved reserves of 1,139 mmboe. Capital and exploration costs related to these reserve additions were in-line with previous guidance.

Strengthened MAP Assets

Throughout 2004, MAP remained focused on its strategy of leveraging refining and marketing investments in core markets, as well as expanding and enhancing its asset base while controlling costs. In doing so, the company has continued its efforts to be a top quartile performer in the U.S. downstream business.

MAP's Catlettsburg refinery multi-year improvement project was completed during the first quarter. At a cost of approximately $440 million, the project improves product yields and lowers overall refinery costs while making gasoline with less than 30 parts per million of sulfur, which allowed MAP to meet the Tier II gasoline regulations that became effective on January 1, 2004.

The company also increased its overall crude oil refining capacity during the first quarter from 935,000 bpd to 948,000 bpd after completing a planned turnaround and expansion project at the Garyville, Louisiana, refinery where its total crude oil capacity increased from 232,000 bpd to 245,000 bpd. This expansion marked the first increase in crude distillation capacity since MAP was formed in 1998.

MAP achieved record refinery throughputs during the fourth quarter and full-year 2004. Crude throughput for the quarter averaged 975,000 bpd, and for the year 939,000 bpd. Total throughput averaged 1,175,000 bpd for the quarter and 1,110,000 bpd for the year. This full-year record performance was achieved even though the company had undertaken a significant number of planned turnarounds during the first quarter of 2004 at the Garyville, Louisiana; Catlettsburg, Kentucky; and Canton, Ohio, refineries.

MAP continued progress on its Detroit refinery expansion project during 2004. The project, which remains on schedule for completion in late 2005, will increase the refinery's crude processing capacity from 74,000 bpd to 100,000 bpd.

Speedway SuperAmerica LLC continued to post strong same store merchandise sales results during the quarter. Fourth quarter same store sales were up approximately 10 percent, with full-year sales up approximately 11 percent when compared to full-year 2003 results.

Advanced Integrated Gas Strategy

Marathon continued to progress the company's integrated gas strategy throughout the year. This strategy is designed to complement Marathon's exploration and production operations focusing on accessing low cost stranded natural gas resources and adding value by applying technology and commercial skills to connect those resources to the major consuming markets.

In June 2004, Marathon, the Government of Equatorial Guinea and Compania Nacional de Petroleos de Guinea Ecuatorial (GEPetrol), the National Oil Company of Equatorial Guinea, announced that the parties had reached a final investment decision for the Equatorial Guinea LNG project. Construction is on schedule for shipment of first cargoes of LNG in late 2007. This project is expected to be one of the lowest cost LNG operations in the Atlantic basin with an all-in LNG operating, capital and feedstock cost of approximately $1 per million British thermal units (mmbtu) at the loading flange of the LNG plant. Efforts are underway to acquire additional gas supply and expand the utilization of this LNG facility above and beyond the contract to supply 3.4 million metric tons per year to BG Gas Marketing Ltd. for 17 years. Marathon also is seeking additional natural gas supplies in the area that could lead to the development of a second LNG train.

During the fourth quarter, Marathon signed an agreement with BP Energy Company under which BP will supply Marathon with 58 billion cubic feet (bcf) of natural gas per year, as LNG, for a minimum period of five years beginning in the second half of 2005. Marathon will take delivery at the Elba Island, Georgia, LNG regasification terminal where the company holds rights to deliver and sell up to 58 bcf of natural gas per year. Pricing of the LNG will be linked to the Henry Hub Index.

During 2004, Marathon secured six cargoes of LNG utilizing its Elba Island delivery rights. The company is continuing to actively seek additional cargoes prior to the start of deliveries under the BP supply agreement. In addition, Marathon and Syntroleum Corporation successfully completed the construction and operation of a GTL demonstration plant at the Port of Catoosa, Oklahoma. This GTL project was part of an ultra-clean fuels production and demonstration project sponsored by the U.S. Department of Energy's (DOE) National Energy Technology Laboratory. The Catoosa plant, which mirrored a commercial scale plant, successfully demonstrated a fully integrated GTL technology that converted natural gas into a finished fuel, producing more than 5,500 barrels of synthetic products, including ultra-clean diesel fuel, which was delivered to Integrated Concepts Research Corporation (ICRC), a project partner, for fleet vehicle testing in Washington, DC, and Denali National Park, Alaska. The successful Catoosa GTL plant supports Marathon's ongoing efforts to explore the potential of GTL technology, and demonstrated how such technology could be incorporated into the design of a commercial GTL facility such as Marathon's proposed gas processing project in Qatar.

Status of Marathon's Planned Acquisition of Ashland's Interest in MAP Marathon and Ashland Inc. continue to pursue the completion of the previously announced transaction under which Marathon would acquire Ashland's 38 percent interest in MAP.

Segment Results

Total segment income was $855 million in fourth quarter 2004 and $3.150 billion for full year 2004, compared with $459 million and $2.396 billion in the same periods in 2003.

Exploration and Production

Worldwide upstream segment income totaled $443 million in fourth quarter 2004 and $1.696 billion for the year, compared to $372 million and $1.580 billion in the same periods of 2003.

United States upstream income was $238 million in fourth quarter 2004 and $1.073 billion for the year, compared to $249 million and $1.155 billion in the same periods of 2003. The decreases were primarily due to lower liquid hydrocarbon and natural gas volumes primarily resulting from base decline, weather-related downtime in the Gulf of Mexico and the sale of the Yates field partially offset by higher liquid hydrocarbon and natural gas prices.

Further, derivative losses totaled $20 million in fourth quarter 2004 and $118 million for the year, compared to losses of $15 million and $91 million in the same periods of 2003.

International upstream income was $205 million in fourth quarter 2004 and $623 million for the year, compared to $123 million and $425 million in the same periods of 2003. The increases were primarily due to higher liquid hydrocarbon and natural gas prices and volumes partially offset by higher derivative losses. Derivative losses totaled $21 million in fourth quarter 2004 and $51 million for the year, compared to losses of $8 million and $19 million in the same periods of 2003.

Marathon estimates its 2005 production will average approximately 325,000 to 350,000 barrels of oil equivalent per day (boepd), excluding the impact of any acquisitions, dispositions or potential reentry into Libya.

Refining, Marketing and Transportation

Downstream segment income was $389 million in fourth quarter 2004 and $1.406 billion for the year versus segment income of $97 million and $819 million in the comparable periods of 2003. This was the best fourth quarter financial performance in MAP's history. The improvement in fourth quarter earnings was primarily due to better refining and wholesale marketing margins, which averaged 9.6 cents per gallon in fourth quarter 2004 versus 4.1 cents in the comparable 2003 quarter. Margins improved primarily due to wider than normal price differentials between sweet and sour crudes, which also allowed MAP to increase its crude oil throughputs last quarter compared to the same quarter last year. Approximately 60 percent of MAP's crude oil inputs consist of sour crudes. Operationally, MAP's refining system ran very well during the quarter averaging 975,000 barrels of crude oil throughput per day or 103 percent of average system capacity.

The year-over-year increase in segment income primarily reflects higher refining and wholesale marketing margins, which averaged 8.8 cents per gallon versus 6.0 cents in 2003. Margins improved initially due to the market's concerns about refiners' ability to supply the new Tier II low sulfur gasolines which were required effective January 1, 2004 and, more recently, due to concerns about the adequacy of distillate supplies heading into winter. In addition, the widening in the sweet/sour crude differentials noted above positively affected the total year 2004 results. The 2003 third quarter also included $34 million of gains from the sale of certain interests in refined product pipelines. For the full year 2004 MAP averaged 939,000 barrels of crude oil throughput per day or 99 percent of average system capacity.

Integrated Gas

Integrated gas segment income was $23 million in fourth quarter 2004 and $48 million for the year, compared with losses of $10 million and $3 million in the same periods of 2003. The increases were primarily the result of increased earnings from Marathon's investment in Atlantic Methanol Production Company LLC (AMPCO) and higher income from LNG operations, partially offset by costs associated with ongoing development of certain integrated gas projects and lower margins from gas marketing activities, including recognized changes in the fair value of derivatives used to support those activities. The AMPCO methanol plant in Equatorial Guinea has been operating at a 95 percent on- stream factor in 2004 and prices have remained strong, averaging nearly $227 per ton for the year. Additionally, the fourth quarter 2003 results include a loss of $17 million on the termination of two tanker operating leases. The full-year 2003 results also included an impairment charge of $22 million on an equity method investment.

Unallocated Administrative Expenses

Unallocated administrative expenses were higher year-over-year. Results for 2004 included a $47 million charge related to equity-based compensation, primarily as a result of an increase in Marathon's common stock price during the year. Results also included $43 million of costs related to business transformation and outsourcing activities, including $23 million of upfront costs and $20 million of net settlement and curtailment losses on employee benefit plans resulting from workforce reductions. The outsourcing activities are a part of Marathon's and MAP's ongoing business transformation efforts to make the companies more efficient, improve business focus and reduce costs beginning in 2005.

Special Items

During the fourth quarter of 2004, Marathon recorded impairments of $32 million related to unproved properties and $12 million related to producing properties primarily as a result of unsuccessful developmental drilling activity in Russia.

Marathon has two long-term gas sales contracts in the United Kingdom that are accounted for as derivative instruments. Changes in the mark-to-market valuation of these contracts must be recognized in current period income. Non-cash effects from the change in the mark-to-market valuation of these contracts were a gain of $111 million in fourth quarter 2004 and a loss of $99 million for the year, compared to losses of $33 million and $66 million in the comparable periods of 2003. The gain in the fourth quarter of 2004 resulted primarily from the weakening of the 18-month forward gas price curve in the United Kingdom and the annual resetting of these contracts on October 1. Due to the volatility in the fair value of these contracts, Marathon will continue to exclude these non-cash gains and losses from "net income adjusted for special items."

During the fourth quarter of 2004, Marathon recognized a $32 million expense related to estimated future obligations to make certain insurance premium payments related to past loss experience.

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